1. MICROECONOMICS: CHAPTER TWO ● The Economic Problem: Scarcity, Wants, and Choices.

2. THE ECONOMIC PROBLEM ● Society's Wants are virtually unlimited. ● The resources for producing the goods and services to satisfy society's wants are limited or scarce. ● This means that economic choices are necessary.

3. UTILITY AND WANTS ● What are wants? The desires of consumers to obtain and use various goods and services that provide “utility” ● Utility: The pleasure or satisfaction derived from something. These can be biological, social, etc. ● Our desire for one good may be satisified, but in general, our demand for goods and services are insatiable.

4. SCARCE RESOURCES ● Economic Resources: The land, labour, capital, and entrepreneurial ability that are used in the production of goods and services.

5. LAND ● Land: All natural resources, not just property. Includes mineral deposits, oil, trees, etc. Canada profits a great deal from exploiting this category. ● Payments are Rents ● Easter Island did not have enough “land,” and the economy collapsed.

6. LABOUR & CAPITAL. ● Labour: all the physical and mental talents of individuals available to produce goods and services. Increased education might increase this category, as might immigration. Why? ● Payments = Wages. ● Capital: Human-made resources, such as: buildings, machinery, equipment. Used to produce goods and services. Pizza Hut would need a pizza oven, tables, etc. ● Payments = Interest

7. ENTREPRENEURIAL ABILITY. ● Entrepreneurial Ability: The human resource that combines the other resources to produce a product, make non-routine decisions, innovate, and bear risks. How did the western world come to dominate? ● Payments = Profits ● The entrepreneur: ● INITIATES, ● INNOVATES, ● RISKS, ● DECIDES.

8. FULL EMPLOYMENT ● Full employment is the use of all “available” resources to produce want-satisfying goods and services. ● An efficient economy produces as many goods and services as possible with its available resources. ● Full Employment alone cannot achieve maximum efficiency. Why?

9. FULL PRODUCTION ● Full Production and Full Employment are required for maximum efficiency. ● ● Full Production is the employment of available resources so that the maximum amount of goods and services is produced. Max wants satisfied. ● Full Production requires both productive and allocative efficiency.

10. PRODUCTIVE AND ALLOCATIVE EFFICIENCY ● Productive efficiency is the production of a good in the least costly way. This leaves more resources to satisfy other wants. ● Allocative efficiency is the apportionment of resources among industries to obtain the production of the products most wanted by consumers

11. PRODUCTION POSSIBILITIES MODEL / CURVE ● A production possibilities curve shows the different combinations of goods and services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed. ● Society must choose which goods and services to produce and which to forgo. There must be trade-offs

12. ASSUMPTIONS OF A PRODUCTION POSSIBILITIES MODEL / CURVE 1. Full Employment and Productive Efficiency: employing all available resources + is producing them at the least cost. 2. Fixed Resources: available supplies of factors of production are fixed. 3. Fixed Technology: state of technology fixed, it implies a short time period. 4. Two Goods: in this case, we are producing fish or tanks.

13. PRODUCTION POSSIBILITIES TABLE http://clarkeeducation.weebly.com/uploads/7/8/1/9/7819752/2._economic_problem_class_handout.pdf As we move along the production possibilities curve, we increase the Production of Tanks at the expense of Fish, and vice versa. An economy achieving full employment and productive efficiency Must sacrifice some of one good to obtain another.

14. PRODUCTION POSSIBILITIES CURVE / FRONTIER ● The production possibilities curve is also known as a production possibilities frontier because it shows the limit of attainable outputs. ● Points lying inside the curve are attainable, but not desired because they mean that the economy could be satisfying more wants if it was more efficient. ● Points outside the curve are not attainable because we do not have the current factors of production. How could we expand the curve?

15. THE LAW OF INCREASING OPPORTUNITY COSTS ● Opportunity Cost is the amount of other products that must be forgone or sacrificed to obtain a unit of another product or service. ● The Law of Increasing Opportunity Costs states that as the production of a good increases, the opportunity cost of producing an additional unit rises. ● Key Graph Quiz on Page 33 (note the difference between marginal and total opportunity cost).

16. SHAPES OF THE PRODUCTION POSSIBILITIES CURVE ● It is concave to the origin in our example due to the law of increasing opportunity costs. ● At the link below, there are a total of three curve types. ● 1. Increasing opportunity costs. ● 2. Constant opportunity costs. ● 3. Decreasing opportunity costs (specialization). ● http://en.wikipedia.org/wiki/Production– possibility_frontier#Shape http://en.wikipedia.org/wiki/Production– possibility_frontier#Shape

17. CHAPTER ASSIGNMENT QUESTIONS ● Page 47. Questions 1, 4, 5.